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Thai Airways Int'l

Outlook depends on the scenario that plays out with martial law in place

Thai Airways Int’l Plc (THAI)

Investment thesis

The key messages at the analyst meeting yesterday reaffirmed a weak earnings outlook, due to sluggish demand (as a result of political unrest) and cost inflexibility. These factors will continue to make for an uninspiring share price performance. Moreover, Thai tourism low season started in 2Q14, so we don't see any scope for a price catalyst in the short-term. However, the market has already priced in such concerns. THAI currently trades at a YE14 PBV of 0.6x—discounts to both its long-term average of 0.8x and to the regional mean of 0.9x. Downside risk to the share price appears limited.

Expect 2Q14 numbers to weaken further

The second-quarter is low season for Thai tourism and the political mess persists, so we expect THAI's passenger numbers to weaken both YoY and QoQ in 2Q14. The cabin factor was 71.1percent for April (against 75.8percent for April 2013), while bookings are 64.8percent for May and 44.7percent for June. We, therefore, expect the 2Q14 cabin factor to drop to 67percent from 70.5% in 2Q13. Moreover, the firm is offering promotional fares to boost sales during the quarter. As such, the passenger yield will probably decline QoQ (but the passenger yield should rise in YoY terms, as the promotional fares are unlikely to be as generous as they were in 2Q13). We, therefore, anticipate that THAI's 2Q14 core loss will deepen both YoY and QoQ.

Martial law—two scenarios, two very different outcomes for THAI

The political climate after the imposition of martial law is a key factor to watch. One of two scenarios is likely to play out: 1) the political unrest eases, boosting demand for travel to and within Thailand, or 2) the political mess persists, violence intensifies, martial law remains in place and tourist arrivals decline sharply (currently, 29 govts advise their citizens against travelling to Thailand). We have no way of predicting ahead of time which scenario will play out—that will depend on the players. THAI's 2Q14 operational outlook is very much up in the air.

Hybrid bond to bring down debt ratio, easing cash call concerns

THAI spent heavily to expand its fleet in FY13-14, while the political turmoil and weak economy have impacted on its revenue. The firm's cash flows have declined and its interest-bearing debt (IBD)/equity ratio has jumped from 2x at end-March 2013 to 3.4x at end-March 2014. Because of the blowout in the IBD/equity ratio, the firm plans to issue a hybrid bond this year in order to bring down the ratio to 2.7-2.8x. That implies a hybrid bond value of Bt10bn.

Hybrid bonds are treated as "equity credit" by rating agencies, as they don't have enforceable maturity dates and the issuer can defer paying a coupon if it deems it necessary (though it can't pay dividends to shareholders till it is square with coupon payment obligations).

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